EXHIBIT 10.1
                                                                  EXECUTION COPY




                        COMMON STOCK PURCHASE AGREEMENT


                                 BY AND BETWEEN


                          KINGSBRIDGE CAPITAL LIMITED


                                      AND


                          DISCOVERY LABORATORIES, INC.


                            DATED AS OF JULY 7, 2004

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ARTICLE I       DEFINITIONS

Section 1.02.   "Blackout Amount"............................................1
Section 1.03.   "Bloomberg"..................................................1
Section 1.04.   "Charter"....................................................1
Section 1.05.   "Closing Date"...............................................2
Section 1.06.   "Commission".................................................2
Section 1.07.   "Commission Documents".......................................2
Section 1.08.   "Commitment Period"..........................................2
Section 1.09.   "Common Stock"...............................................2
Section 1.10.   "Control"....................................................2
Section 1.11.   "Condition Satisfaction Date"................................2
Section 1.12.   "Damages"....................................................2
Section 1.13.   "Draw Down"..................................................2
Section 1.14.   "Draw Down Amount"...........................................2
Section 1.15.   "Draw Down Discount Price"...................................2
Section 1.16.   "Draw Down Notice"...........................................2
Section 1.17.   "Draw Down Pricing Period"...................................3
Section 1.18.   "Effective Date".............................................3
Section 1.19.   "Exchange Act"...............................................3
Section 1.20.   "Knowledge"..................................................3
Section 1.21.   "Legend".....................................................3
Section 1.22.   "Make Whole Amount"..........................................3
Section 1.23.   "Market Capitalization"......................................3
Section 1.24.   "Material Adverse Effect"....................................3
Section 1.25.   "Maximum Commitment Amount"..................................3
Section 1.26.   "Maximum Draw Down Amount"...................................3
Section 1.27.   "NASD".......................................................3
Section 1.28.   "Other Financing"............................................3
Section 1.29.   "Permitted Transaction"......................................3
Section 1.30.   "Person".....................................................4
Section 1.31.   "Principal Market"...........................................4
Section 1.32.   "Prohibited Transaction".....................................4
Section 1.33.   "Prospectus".................................................4
Section 1.34.   "Registrable Securities".....................................4

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Section 1.35.   "Registration Rights Agreement"..............................4
Section 1.36.   "Registration Statement".....................................4
Section 1.37.   "Regulation D"...............................................4
Section 1.38.   "Section 4(2)"...............................................4
Section 1.39.   "Securities Act".............................................4
Section 1.40.   "Settlement Date"............................................4
Section 1.41.   "Shares".....................................................5
Section 1.42.   "Threshold Price"............................................5
Section 1.43.   "Trading Day"................................................5
Section 1.44.   "Underwriter"................................................5
Section 1.45.   "VWAP".......................................................5
Section 1.46.   "Warrant"....................................................5
Section 1.47.   "Warrant Shares".............................................5

ARTICLE II      PURCHASE AND SALE OF COMMON STOCK............................5

Section 2.01.   Purchase and Sale of Stock...................................5
Section 2.02.   Closing......................................................5
Section 2.03.   Warrant......................................................6

ARTICLE III     DRAW DOWN TERMS..............................................6

Section 3.01.   Draw Down Notice.............................................6
Section 3.02.   Number of Shares.............................................6
Section 3.03.   Limitation on Draw Downs.....................................6
Section 3.04.   Trading Cushion..............................................6
Section 3.05.   Expiration of Draw Downs.....................................6
Section 3.06.   Settlement...................................................6
Section 3.07.   Delivery of Shares; Payment of Draw Down Amount..............7
Section 3.08.   Threshold Price..............................................7
Section 3.09.   Other Issuances..............................................7
Section 3.10.   Failure to Deliver Shares....................................7

ARTICLE IV      REPRESENTATIONS AND WARRANTIES OF THE COMPANY................8

Section 4.01.   Organization, Good Standing and Power........................8
Section 4.02.   Authorization; Enforcement...................................8
Section 4.03.   Capitalization...............................................8
Section 4.04.   Issuance of Shares...........................................9
Section 4.05.   No Conflicts.................................................9

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Section 4.06.   Commission Documents, Financial Statements..................10
Section 4.07.   No Material Adverse Change..................................10
Section 4.08.   No Undisclosed Liabilities..................................11
Section 4.09.   No Undisclosed Events or Circumstances......................11
Section 4.10.   Actions Pending.............................................11
Section 4.11.   Compliance with Law.........................................11
Section 4.12.   Certain Fees................................................11
Section 4.13.   Disclosure..................................................11
Section 4.14.   Material Non-Public Information.............................12
Section 4.15.   Exemption from Registration; Valid Issuances................12
Section 4.16.   No General Solicitation or Advertising in Regard to
                this Transaction............................................12
Section 4.17.   No Integrated Offering......................................12

ARTICLE V       REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE INVESTOR...13

Section 5.01.   Organization and Standing of the Investor...................13
Section 5.02.   Authorization and Power.....................................13
Section 5.03.   No Conflicts................................................13
Section 5.04.   Financial Capability; Accredited Investor...................14
Section 5.05.   Information.................................................14
Section 5.06.   Selling Restrictions........................................14
Section 5.07.   Statutory Underwriter Status................................15
Section 5.08.   Compliance with Insider Trading Rules.......................15

ARTICLE VI      COVENANTS OF THE COMPANY....................................15

Section 6.01.   Securities..................................................15
Section 6.02.   Reservation of Common Stock.................................15
Section 6.03.   Registration and Listing....................................15
Section 6.04.   Registration Statement......................................16
Section 6.05.   Compliance with Laws........................................16
Section 6.06.   Reporting Requirements......................................16
Section 6.07.   Other Financing.............................................16
Section 6.08.   Prohibited Transactions.....................................17
Section 6.09.   Corporate Existence.........................................17
Section 6.10.   Non-Disclosure of Non-Public Information....................17
Section 6.11.   Notice of Certain Events Affecting Registration;
                Suspension of Right to Request a Draw Down..................17
Section 6.12.   Amendments to the Registration Statement....................18
Section 6.13.   Prospectus Delivery.........................................18

                                       19
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ARTICLE VII     CONDITIONS TO THE OBLIGATION OF THE INVESTOR TO ACCEPT
                A DRAW DOWN.................................................18

Section 7.01.   Accuracy of the Company's Representations and Warranties....18
Section 7.02.   Performance by the Company..................................19
Section 7.03.   Compliance with Law.........................................19
Section 7.04.   Effective Registration Statement............................19
Section 7.05.   No Knowledge................................................19
Section 7.06.   No Suspension...............................................19
Section 7.07.   No Injunction...............................................19
Section 7.08.   No Proceedings or Litigation................................19
Section 7.09.   Section 16 Limitation.......................................19
Section 7.10.   Sufficient Shares Registered for Resale.....................20
Section 7.11.   Warrant.....................................................20
Section 7.12.   Opinion of Counsel..........................................20

ARTICLE VIII    LEGENDS.....................................................20

Section 8.01.   Legends.....................................................20
Section 8.02.   No Other Legend or Stock Transfer Restrictions..............21

ARTICLE IX      TERMINATION.................................................22

Section 9.01.   Term........................................................22
Section 9.02.   Other Termination...........................................22

ARTICLE X       INDEMNIFICATION.............................................23

Section 10.01.  Indemnification.............................................23
Section 10.02.  Notification of Claims for Indemnification..................24

ARTICLE XI      ARBITRATION.................................................25

Section 11.01.  Arbitration.................................................25
Section 11.02.  Board of Arbitration........................................26
Section 11.03.  Counterclaims...............................................26
Section 11.04.  Procedures..................................................26

ARTICLE XII     MISCELLANEOUS...............................................27

Section 12.01.  Fees and Expenses...........................................27
Section 12.02.  Reporting Entity for the Common Stock.......................27
Section 12.03.  Acknowledgement Regarding the Investor's Purchase of
                Shares......................................................28
Section 12.04.  Brokerage...................................................28
Section 12.05.  Notices.....................................................28

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Section 12.06.  Assignment..................................................29
Section 12.07.  Amendment; No Waiver........................................29
Section 12.08.  Entire Agreement............................................29
Section 12.09.  Severability................................................30
Section 12.10.  Title and Subtitles.........................................30
Section 12.11.  Counterparts................................................30
Section 12.12.  Choice of Law...............................................30
Section 12.13.  Specific Enforcement, Consent to Jurisdiction...............30
Section 12.14.  Survival....................................................31
Section 12.15.  Publicity...................................................31
Section 12.16.  Further Assurances..........................................31

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      This COMMON STOCK PURCHASE  AGREEMENT is entered into as of the 7th day of
July, 2004 (this  "Agreement"),  by and between  Kingsbridge Capital Limited, an
entity  organized and existing under the laws of the British Virgin Islands (the
"Investor"),  and  DISCOVERY  LABORATORIES,  INC., a  corporation  organized and
existing under the laws of the State of Delaware (the "Company").

      WHEREAS,  the  parties  desire  that,  upon the terms and  subject  to the
conditions and limitations  set forth herein,  the Company may issue and sell to
the  Investor,  from time to time,  and the  Investor  shall  purchase  from the
Company, up to $75 million of shares of Common Stock (as defined below); and

      WHEREAS,  such investments will be made in reliance upon the provisions of
Section 4(2) ("Section  4(2)") and  Regulation D ("Regulation  D") of the United
States  Securities  Act of  1933  and  the  rules  and  regulations  promulgated
thereunder (the  "Securities  Act"),  and/or upon such other exemptions from the
registration requirements of the Securities Act as may be available with respect
to any or all of the investments in Common Stock to be made hereunder; and

      WHEREAS, the parties hereto are concurrently  entering into a Registration
Rights  Agreement  in the form of  Exhibit A hereto  (the  "Registration  Rights
Agreement")  pursuant to which the Company  intends to register the Common Stock
issued and sold to the Investor  under this  Agreement and under the Warrant (as
defined below), upon the terms and subject to the conditions and limitations set
forth therein; and

      WHEREAS,  in consideration  for the Investor's  execution and delivery of,
and its performance of its  obligations  under,  this Agreement,  the Company is
concurrently  issuing to the  Investor a Warrant in the form of Exhibit B hereto
(the "Warrant")  pursuant to which the Investor may purchase from the Company up
to 375,000 shares of Common Stock,  upon the terms and subject to the conditions
set forth therein;

      NOW, THEREFORE, the parties hereto agree as follows:

                                   ARTICLE I

                                 DEFINITIONS

      Section  1.01.  "Affiliate"  shall mean,  as to the party  specified,  any
Person which  directly or  indirectly  Controls,  is  Controlled  by or is under
common Control with, such party.

      Section 1.02.  "Blackout  Amount" shall have the meaning  assigned to such
term in the Registration Rights Agreement.

      Section 1.03.  "Bloomberg"  means the  interactive  financial  information
network operated by Bloomberg L.P.

      Section 1.04.  "Charter"  shall have the meaning  assigned to such term in
Section 4.03 hereof.

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      Section  1.05.  "Closing  Date" means the date on which this  Agreement is
executed and delivered by the Company and the Investor.

      Section 1.06. "Commission" means the United States Securities and Exchange
Commission.

      Section 1.07.  "Commission  Documents"  shall have the meaning assigned to
such term in Section 4.06 hereof.

      Section  1.08.  "Commitment  Period"  means the period  commencing  on the
Effective  Date and  expiring on the  earliest to occur of (x) the date on which
the Investor  shall have  purchased  Shares  pursuant to this  Agreement  for an
aggregate  purchase price equal to the Maximum  Commitment  Amount, (y) the date
this  Agreement  is  terminated  pursuant  to Article IX hereof and (z) the date
occurring 36 months from the Effective Date.

      Section 1.09.  "Common  Stock" means the common stock of the Company,  par
value $0.001 per share.

      Section 1.10. "Control"  (including the terms  "Controlling,"  "Controlled
by" and "under common Control with") means the  possession,  direct or indirect,
of the  power,  either  individually  or with  others,  to  direct  or cause the
direction  of the  management  and  policies  of a Person,  whether  through the
ownership of voting securities,  by contract,  or otherwise as set forth in Rule
405 promulgated under the Securities Act.

      Section  1.11.  "Condition  Satisfaction  Date"  shall  have  the  meaning
assigned to such term in Article VII hereof.

      Section 1.12. "Damages" means any loss, claim, damage, liability, cost and
expense (including, without limitation,  reasonable attorneys' fees and expenses
and reasonable costs and expenses of expert witnesses and investigation).

      Section 1.13.  "Draw Down" shall have the meaning assigned to such term in
Section 3.01 hereof.

      Section  1.14.  "Draw Down Amount"  means the actual amount of a Draw Down
paid to the Company.

      Section 1.15.  "Draw Down Discount Price" means (i) 90% of the VWAP on any
Trading  Day  during the Draw Down  Pricing  Period  when the VWAP  equals to or
exceeds  $5.00 but is less  than or equal to $9.00,  (ii) 92% of the VWAP on any
Trading Day during the Draw Down Pricing  Period when the VWAP exceeds $9.00 but
is less than or equal to $14.00  and  (iii) 94% of the VWAP on any  Trading  Day
during the Draw Down Pricing Period when the VWAP exceeds $14.00.

      Section 1.16.  "Draw Down Notice" shall have the meaning  assigned to such
term in Section 3.01 hereof.

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      Section 1.17.  "Draw Down Pricing Period" shall mean, with respect to each
Draw Down, a period of fifteen (15)  consecutive  Trading Days  beginning on the
first Trading Day specified in a Draw Down Notice.

      Section 1.18.  "Effective  Date" means the first  Trading Day  immediately
following the date on which the Registration  Statement is declared effective by
the Commission.

      Section 1.19.  "Exchange Act" means the federal Securities Exchange Act of
1934, as amended, and the rules and regulations promulgated thereunder.

      Section  1.20.  "Knowledge"  means the actual  knowledge of the  Company's
Chief Executive Officer, Chief Financial Officer or any Senior or Executive Vice
President.

      Section 1.21. "Legend" shall have the meaning specified in Section 8.1.

      Section  1.22.  "Make Whole  Amount"  shall have the meaning  specified in
Section 3.10.

      Section 1.23.  "Market  Capitalization"  means, as of any Trading Day, the
product  of (i) the  closing  sale  price of the  Common  Stock as  reported  by
Bloomberg  using the AQR function and (ii) the number of  outstanding  shares of
Common Stock of the Company as reported by Bloomberg using the DES function.

      Section 1.24.  "Material Adverse Effect" means any effect on the business,
operations,   properties   or  financial   condition  of  the  Company  and  its
consolidated  subsidiaries  that is material and adverse to the Company and such
subsidiaries, taken as a whole, and/or any condition,  circumstance or situation
that would  prohibit or otherwise  interfere  with the ability of the Company to
perform any of its obligations  under this Agreement,  the  Registration  Rights
Agreement or the Warrant in any  material  respect;  provided,  that none of the
following  shall  constitute  a "Material  Adverse  Effect":  (i) the effects of
conditions  or events that are generally  applicable to the capital,  financial,
banking, currency,  biotechnology or pharmaceutical markets; (ii) any changes or
effects  resulting from the  announcement or  consummation  of the  transactions
contemplated by this Agreement,  including,  without limitation,  any changes or
effects  associated  with any  particular  Draw Down;  and (iii)  changes in the
market price of the Common Stock.

      Section 1.25.  "Maximum  Commitment Amount" means $75 million in aggregate
Draw Down Amounts.

      Section  1.26.  "Maximum  Draw Down  Amount"  means 4.9% of the  Company's
Market Capitalization at the time of the Draw Down; provided, however, that such
amount shall not exceed $18.75 million in respect of any Draw Down.

      Section 1.27. "NASD" means the National Association of Securities Dealers,
Inc.

      Section 1.28.  "Other  Financing"  shall have the meaning assigned to such
term in Section 6.07 hereof.

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      Section 1.29.  "Permitted  Transaction" shall have the meaning assigned to
such term in Section 6.07 hereof.

      Section 1.30.  "Person" means any  individual,  corporation,  partnership,
limited liability company,  association,  trust or other entity or organization,
including   any   government   or   political   subdivision   or  an  agency  or
instrumentality thereof.

      Section 1.31. "Principal Market" means the National Market or the SmallCap
Market  of the  National  Association  of  Securities  Dealers,  Inc.  Automated
Quotation  Service,  the American Stock Exchange or the New York Stock Exchange,
whichever is at the time the principal trading exchange or market for the Common
Stock.

      Section 1.32. "Prohibited  Transaction" shall have the meaning assigned to
such term in Section 6.08 hereof.

      Section 1.33.  "Prospectus" as used in this Agreement means the prospectus
in the form included in the Registration Statement, as supplemented from time to
time.

      Section  1.34.  "Registrable  Securities"  means (i) the Shares,  (ii) the
Warrant Shares and (iii) any  securities  issued or issuable with respect to any
of the Shares or Warrant  Shares by way of  exchange,  stock  dividend  or stock
split or in connection with a combination of shares,  recapitalization,  merger,
consolidation  or  other  reorganization  or  otherwise.  As to  any  particular
Registrable  Securities,   once  issued,  such  securities  shall  cease  to  be
Registrable  Securities  when (w) the  Registration  Statement has been declared
effective by the Commission and such  Registrable  Securities have been disposed
of pursuant to the Registration  Statement,  (x) such Registrable Securities may
be sold under the  applicable  conditions of Rule 144 (or any similar  provision
then in force)  promulgated under the Securities Act ("Rule 144"), (y) such time
as such  Registrable  Securities have been otherwise  transferred to holders who
may trade such shares  without  restriction  under the  Securities  Act, and the
Company has delivered a new  certificate or other evidence of ownership for such
securities not bearing a restrictive  legend or (z) in the opinion of counsel to
the Company (which may be internal counsel),  such Registrable Securities may be
sold without  registration  and without any time,  volume or manner  limitations
pursuant  to Rule  144(k) (or any similar  provision  then in effect)  under the
Securities Act.

      Section 1.35.  "Registration  Rights Agreement" shall have the meaning set
forth in the recitals of this Agreement.

      Section 1.36.  "Registration Statement" shall have the meaning assigned to
such term in the Registration Rights Agreement.

      Section  1.37.  "Regulation  D" shall  have the  meaning  set forth in the
recitals of this Agreement.

      Section  1.38.  "Section  4(2)"  shall have the  meaning  set forth in the
recitals of this Agreement.

                                       25
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      Section  1.39.  "Securities  Act" shall have the  meaning set forth in the
recitals of this Agreement.

      Section 1.40.  "Settlement  Date" shall have the meaning  assigned to such
term in Section 3.06 hereof.

      Section  1.41.  "Shares"  means the shares of Common Stock that are and/or
may be purchased hereunder.

      Section  1.42.  "Threshold  Price"  means the lowest  "Draw Down  Discount
Price" (as  specified by the Company in a Draw Down Notice) at which the Company
will agree to sell Shares during the applicable Draw Down Pricing Period,  which
price shall not be less than $5.00 per share.

      Section  1.43.  "Trading  Day" means any day other  than a  Saturday  or a
Sunday on which the Principal Market is open for trading in equity securities.

      Section 1.44.  "Underwriter"  shall mean any  underwriter  (other than the
Investor,   to  the  extent  it  is  deemed  to  be  a  statutory   underwriter)
participating in any disposition of the Registrable  Securities on behalf of the
Investor pursuant to the Registration Statement.

      Section  1.45.  "VWAP" means the volume  weighted  average price per share
(the aggregate sales price of all trades of Common Stock during each Trading Day
divided by the total number of shares of Common Stock traded during such Trading
Day) of the Common Stock  during any Trading Day as reported by Bloomberg  using
the AQR function.

      Section 1.46.  "Warrant"  shall have the meaning set forth in the recitals
of this Agreement.

      Section 1.47.  "Warrant  Shares" means the shares of Common Stock issuable
to the Investor upon exercise of the Warrant.

                                   ARTICLE II

                       PURCHASE AND SALE OF COMMON STOCK

      Section  2.01.  Purchase and Sale of Stock.  Upon the terms and subject to
the conditions and limitations  set forth in this  Agreement,  the Company shall
issue  and  sell to the  Investor,  and the  Investor  shall  purchase  from the
Company, a number of shares of Common Stock with an aggregate purchase price (in
Draw Down Amounts) equal to up to the Maximum Commitment  Amount,  consisting of
Draw Downs in accordance with Article III hereof.

      Section 2.02.  Closing.  In  consideration  of,  subject to and in express
reliance upon the representations,  warranties,  covenants, terms and conditions
of this Agreement, the Company agrees to issue and sell to the Investor, and the
Investor  agrees to purchase  from the Company,  that number of the Shares to be
issued in  connection  with each Draw Down.  The  closing of the  execution  and
delivery of this  Agreement (the  "Closing")  shall take place at the offices of
Clifford  Chance US LLP, 31 West 52nd  Street,  New York,  NY 10019 at 2:00 p.m.
local time on July 7,  2004,  or at such other time and place or on such date as
the Investor  and the Company may agree upon (the  "Closing  Date").  Each party
shall deliver all documents,  instruments and writings  required to be delivered
by such party pursuant to this Agreement at or prior to the Closing.

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      Section 2.03.  Warrant.  On the Closing Date,  the Company shall issue and
deliver the Warrant to the Investor.

                                  ARTICLE III

                                DRAW DOWN TERMS

      Subject to the  satisfaction  of the conditions  hereinafter  set forth in
this Agreement, the parties agree as follows:

      Section 3.01. Draw Down Notice. The Company,  may, in its sole discretion,
issue one or more Draw Down Notices  with  respect to Draw Downs (each,  a "Draw
Down")  during the  Commitment  Period,  which Draw Downs the  Investor  will be
obligated  to accept.  The  Company  shall  inform the  Investor  via  facsimile
transmission  in accordance  with Section  12.04,  with a copy to the Investor's
counsel,  as to the Draw Down  Amount  the  Company  wishes to  exercise  before
commencement of trading on the first Trading Day of any Draw Down Pricing Period
(the "Draw Down  Notice").  In addition to the Draw Down Amount,  each Draw Down
Notice shall specify the Threshold  Price in respect of the applicable Draw Down
and shall designate the first Trading Day of the Draw Down Pricing Period. In no
event shall any Draw Down Amount exceed the Maximum Draw Down Amount.  Each Draw
Down Notice shall be accompanied by a certificate, signed by the Chief Executive
Officer  or Chief  Financial  Officer  dated as of the  date of such  Draw  Down
Notice, in the form of Exhibit C hereof.

      Section  3.02.  Number  of  Shares.  The  number of Shares to be issued in
connection  with  each  Draw  Down  shall be  equal to the sum of one  fifteenth
(1/15th) of such Draw Down Amount divided by the  applicable  Draw Down Discount
Price for each  Trading Day of the Draw Down  Pricing  Period for which the Draw
Down Discount Price equals or exceeds the Threshold Price.

      Section  3.03.  Limitation  on Draw  Downs.  Only one Draw  Down  shall be
permitted for each Draw Down Pricing Period.

      Section  3.04.  Trading  Cushion.  Unless the parties  agree  otherwise in
writing,  there  shall  be a  minimum  of five  (5)  Trading  Days  between  the
expiration  of any  Draw  Down  Pricing  Period  and the  beginning  of the next
succeeding Draw Down Pricing Period.

      Section 3.05.  Expiration of Draw Downs. Each Draw Down will expire on the
last Trading Day of each Draw Down Pricing Period.

      Section 3.06.  Settlement.  The number of Shares purchased by the Investor
with  respect to each Draw Down shall be  determined  and  settled on a periodic
basis in respect of the  applicable  Draw Down  Pricing  Period.  Settlement  in
respect of each  determination  shall be made at the Company's sole  discretion,
but in any event,  not later than the third  Trading Day after the fifth,  tenth
and fifteenth  Trading Day of the Draw Down Pricing  Period.  Each date on which
settlement of the purchase and sale of Shares occurs hereunder being referred to
as a  "Settlement  Date." The Investor  shall  provide the Company with delivery
instructions  for the Shares to be issued at each  Settlement  Date at least two
(2)  Trading  Days in  advance  of such  Settlement  Date  (except to the extent
previously  provided).  The number of Shares actually issued shall be rounded to
the nearest whole number of Shares.

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      Section  3.07.  Delivery of Shares;  Payment of Draw Down Amount.  On each
Settlement  Date, the Company shall deliver the Shares purchased by the Investor
to the Investor or its designees via  book-entry  through the  Depositary  Trust
Company to an account designated by the Investor in accordance with Section 3.06
upon receipt of payment  therefor from the Investor to the Company's  designated
account by wire transfer of immediately available funds.

      Section  3.08.  Threshold  Price.  For each Trading Day during a Draw Down
Pricing  Period  that the Draw Down  Discount  Price is less than the  Threshold
Price,  no Shares shall be purchased or sold in respect of such Trading Day, the
total amount of the Draw Down Amount in respect of such Draw Down Pricing Period
shall be  reduced  by one  fifteenth  (1/15th)  and the  amount of the Draw Down
Amount not so  purchased  or sold shall  continue to be available in future Draw
Downs and as part of the  Maximum  Commitment  Amount.  If trading in the Common
Stock is  suspended  for any  reason  for more  than  three (3)  consecutive  or
non-consecutive  hours during any Trading Day during a Draw Down Pricing Period,
the Draw Down Discount Price shall be deemed to be less than the Threshold Price
for that Trading Day.

      Section 3.09. Other Issuances. If during any Draw Down Pricing Period, the
Company shall issue any shares of Common Stock in  connection  with a Prohibited
Transaction  without  the  prior  written  consent  of the  Investor,  then  the
applicable Draw Down Notice shall be deemed null and void and the Investor shall
promptly return to the Company any and all Shares transferred to the Investor in
respect of any  Settlement  Date(s) during such Draw Down Pricing Period and the
Company  shall  promptly  thereafter  pay to the  Investor  by wire  transfer of
immediately  available  funds to an  account  designated  by the  Investor  that
portion of the  applicable  Draw Down  Amount  paid to the Company in respect of
such Settlement Date(s).

      Section 3.10.  Failure to Deliver Shares.  If on any Settlement  Date, the
Company  fails to deliver the Shares to be purchased by the  Investor,  and such
failure is not cured within ten (10) Trading  Days  following  the date on which
the Investor  delivered  payment for such Shares,  the Company  shall pay to the
Investor on demand in cash by wire transfer of immediately available funds to an
account designated by the Investor the "Make Whole Amount;"  provided,  however,
that in the event  that the  Company  is  prevented  from  delivering  Shares in
respect  of  any  such  Settlement  Date  in a  timely  manner  by any  fact  or
circumstance that is reasonably within the control of, or directly  attributable
to, the Investor,  then such ten (10) Trading Day period shall be  automatically
extended until such time as such fact or  circumstance is cured. As used herein,
the Make Whole  Amount  shall be an amount equal to the sum of (i) the Draw Down
Amount  actually  paid by the  Investor  in respect of such  Shares plus (ii) an
amount equal to the actual loss  suffered by the Investor in respect of sales to
subsequent  purchasers,   pursuant  to  transactions  entered  into  before  the
Settlement  Date,  of the  Shares  that were  required  to be  delivered  by the
Company, which shall be based upon documentation  reasonably satisfactory to the
Company  demonstrating  the  difference  (if greater than zero)  between (A) the
price per share paid by the Investor to purchase such number of shares of Common
Stock necessary for the Investor to meet its share delivery  obligations to such
subsequent  purchasers minus (B) the average Draw Down Discount Price during the

                                       28
<PAGE>

applicable Draw Down Pricing Period.  In the event that the Make Whole Amount is
not paid  within two (2)  Trading  Days  following  a demand  therefor  from the
Investor, the Make Whole Amount shall accrue interest compounded daily at a rate
of five  percent (5%) per annum up to and  including  the date on which the Make
Whole  Amount is actually  paid.  Notwithstanding  anything to the  contrary set
forth in this  Agreement,  in the event  that the  Company  pays the Make  Whole
Amount (plus  interest,  if  applicable)  in respect of any  Settlement  Date in
accordance  with this Section 3.10,  such payment shall be the  Investor's  sole
remedy in respect of the Company's  failure to deliver Shares in respect of such
Settlement  Date,  the Company shall not be obligated to deliver such Shares and
the  Company  shall not be deemed  to be in  breach  of its  obligations  to the
Investor in connection  with the failure by the Company to deliver Shares to the
Investor on a Settlement Date.

                                   ARTICLE IV

                 REPRESENTATIONS AND WARRANTIES OF THE COMPANY

      The Company hereby makes the following  representations  and warranties to
the Investor:

      Section  4.01.  Organization,  Good  Standing and Power.  The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and has all the  corporate  power and authority to own,
lease and  operate  its  properties  and to carry on its  business  as now being
conducted.  Except as set forth in the Commission  Documents (as defined below),
as of the Closing  Date,  the Company does not own more than fifty percent (50%)
of the outstanding capital stock of or Control any other business entity,  other
than any wholly-owned subsidiary that is not "significant" within the meaning of
Regulation S-X promulgated by the Commission. The Company is duly qualified as a
foreign corporation to do business and is in good standing in every jurisdiction
in which the nature of the business conducted or property owned by it makes such
qualification necessary,  other than those in which the failure so to qualify or
be in good standing would not have a Material Adverse Effect.

      Section  4.02.  Authorization;   Enforcement.  (i)  The  Company  has  the
requisite   corporate  power  and  authority  to  enter  into  and  perform  its
obligations  under this Agreement,  the  Registration  Rights  Agreement and the
Warrant and to issue the Shares,  the Warrant and the Warrant Shares as of their
respective dates of issuance;  (ii) the execution and delivery of this Agreement
and the Registration Rights Agreement, and the execution,  issuance and delivery
of the Warrant,  by the Company and the  consummation by it of the  transactions
contemplated  hereby and  thereby  have been duly  authorized  by all  necessary
corporate  action and no further consent or  authorization of the Company or its
Board of Directors or  stockholders  is required  (other than as contemplated by
Section  6.05);  and (iii) each of this  Agreement and the  Registration  Rights
Agreement  has been duly executed and  delivered,  and the Warrant has been duly
executed,  issued and  delivered,  by the Company and  constitute  the valid and
binding obligations of the Company enforceable against the Company in accordance
with their respective  terms,  except as such  enforceability  may be limited by
applicable  bankruptcy,  insolvency,  or similar laws  relating to, or affecting
generally  the  enforcement  of,  creditors'  rights  and  remedies  or by other
equitable principles of general application.

                                       29
<PAGE>

      Section 4.03. Capitalization.  The authorized capital stock of the Company
and the shares thereof  issued and  outstanding as of December 31, 2003, are set
forth on a Schedule previously delivered to the Investor. All of the outstanding
shares of the Common Stock have been duly and validly authorized and issued, and
are fully paid and  non-assessable.  Except as set forth in this Agreement or in
the Commission  Documents or as previously disclosed to the Investor in writing,
as of the date  hereof,  no shares of Common  Stock are  entitled to  preemptive
rights or registration  rights and there are no outstanding  options,  warrants,
scrip,  rights to subscribe to, call or commitments of any character  whatsoever
relating to, or securities or rights  convertible  into or  exchangeable  for or
giving any right to subscribe  for, any shares of capital  stock of the Company.
Except as set  forth in this  Agreement  or in the  Commission  Documents  or as
previously  disclosed to the Investor in writing,  as of the date hereof,  there
are no  contracts,  commitments,  understandings  or  arrangements  by which the
Company is or may become bound to issue  additional  shares of the capital stock
of the Company or options, securities or rights convertible into or exchangeable
for or giving any right to  subscribe  for any  shares of  capital  stock of the
Company.  Except as  previously  disclosed  to the Investor in writing or in the
Commission  Documents,  as of the date hereof, the Company is not a party to any
agreement granting  registration rights to any Person with respect to any of its
equity securities.  Except as previously disclosed to the Investor in writing or
in the Commission Documents,  as of the Closing Date, the Company is not a party
to, and it has no Knowledge of, any agreement restricting the voting or transfer
of any shares of the  capital  stock of the  Company.  The offer and sale of all
capital  stock,  convertible  securities,  rights,  warrants  or  options of the
Company issued during the twenty-four month period immediately prior to the date
hereof complied with all applicable  federal and state  securities  laws, and to
the  Knowledge of the  Company,  no  stockholder  has a right of  rescission  or
damages  with  respect  thereto  that could  reasonably  be  expected  to have a
Material  Adverse  Effect.  The Company has  furnished or made  available to the
Investor  true and  correct  copies of the  Company's  Restated  Certificate  of
Incorporation,  as amended and in effect on the date hereof (the "Charter"), and
the  Company's  Bylaws,  as  amended  and in  effect  on the  date  hereof  (the
"Bylaws").

      Section  4.04.  Issuance of Shares.  The Shares and the Warrant have been,
and the Warrant  Shares  will be, duly  authorized  by all  necessary  corporate
action  and,  when  issued  and paid for in  accordance  with the  terms of this
Agreement, the Registration Rights Agreement and the Warrant, the Shares and the
Warrant  Shares  shall  be  validly  issued  and  outstanding,  fully  paid  and
non-assessable,  and the Investor shall be entitled to all rights  accorded to a
holder of  shares  of  Common  Stock as long as,  and to the  extent  that,  the
Investor still owns any Shares.

      Section 4.05. No Conflicts.  The  execution,  delivery and  performance of
this Agreement,  the Registration  Rights  Agreement,  the Warrant and any other
document or instrument  contemplated  hereby or thereby,  by the Company and the
consummation by the Company of the transactions  contemplated hereby and thereby
do not,  except  to an  extent  that  would  not  have,  individually  or in the
aggregate,  a Material Adverse Effect:  (i) violate any provision of the Charter
or Bylaws;  (ii) conflict  with, or constitute a default (or an event which with
notice or lapse of time or both would become a default) under, or give to others
any rights of  termination,  amendment,  acceleration  or  cancellation  of, any
material agreement,  mortgage,  deed of trust,  indenture,  note, bond, license,
lease agreement, instrument or obligation to which the Company is a party; (iii)
create or impose a lien,  charge or  encumbrance  on any property of the Company
under any  agreement  or any  commitment  to which the  Company is a party or by
which the  Company  is bound or by which  any of its  respective  properties  or

                                       30
<PAGE>

assets are bound; or (iv) result in a violation of any federal,  state, local or
foreign statute, rule, regulation,  order, judgment or decree (including federal
and state securities or blue sky laws and regulations) applicable to the Company
or any of its  subsidiaries  or by which any property or asset of the Company or
any of its subsidiaries are bound or affected. The Company is not required under
federal,  state or local law, rule or regulation to obtain any material consent,
authorization or order of, or make any filing or registration with, any court or
governmental  agency in order for it to  execute,  deliver or perform any of its
obligations  under this  Agreement,  the  Registration  Rights  Agreement or the
Warrant,  or issue and sell the Shares or the Warrant Shares in accordance  with
the terms hereof and thereof  (other than any filings that may be required to be
made by the Company with the  Commission,  the  NASD/Nasdaq or state  securities
commissions   subsequent  to  the  Closing,  and,  any  registration   statement
(including  any amendment or  supplement  thereto)  which may be filed  pursuant
hereto);  provided,  that  for  purposes  of the  representation  made  in  this
sentence,  the Company is assuming and relying upon the accuracy of the relevant
representations and agreements of the Investor herein.

      Section 4.06. Commission Documents, Financial Statements. The Common Stock
is  registered  pursuant to Section  12(b) or 12(g) of the  Exchange Act and the
Company has timely filed all reports,  schedules,  forms,  statements  and other
documents  required  to be  filed  by it with  the  Commission  pursuant  to the
reporting  requirements of the Exchange Act, including  materials filed pursuant
to Section 13(a) or 15(d) of the Exchange Act (all of the  foregoing,  including
filings  incorporated  by  reference  therein,  being  referred to herein as the
"Commission  Documents").  Except as  previously  disclosed  to the  Investor in
writing,  the Company has maintained all requirements for the continued  listing
or quotation of its Common Stock,  and such Common Stock is currently  listed or
quoted on a Principal Market. The Company has made available to the Investor, or
otherwise  has made  available on its website,  true and complete  copies of the
Commission  Documents  filed with the  Commission  since  December 31, 2002, and
prior to the Closing Date.  As of the date hereof,  the Company has not provided
to the Investor any  information  which,  according to  applicable  law, rule or
regulation, should have been disclosed publicly by the Company but which has not
been so disclosed,  other than with respect to the transactions  contemplated by
this Agreement. As of its date, the Company's Annual Report on Form 10-K for the
year ended  December  31,  2003,  complied  in all  material  respects  with the
requirements of the Exchange Act and the rules and regulations of the Commission
promulgated  thereunder applicable to such document,  and, as of its date, after
giving  effect  to the  information  disclosed  and  incorporated  by  reference
therein,  such Form 10-K did not contain any untrue statement of a material fact
or omit to state a material fact  required to be stated  therein or necessary in
order to make the statements  therein, in light of the circumstances under which
they were made, not  misleading.  As of their  respective  dates,  the financial
statements of the Company  included in the Commission  Documents  filed with the
Commission  since  December 31, 2002,  complied as to form and  substance in all
material  respects with  applicable  accounting  requirements  and the published
rules  and  regulations  of  the  Commission  or  other   applicable  rules  and
regulations with respect thereto.  Such financial  statements have been prepared
in accordance with generally accepted accounting principles in the United States
("GAAP")  applied on a consistent  basis during the periods involved (except (i)
as may be otherwise indicated in such financial  statements or the notes thereto
or (ii) in the case of unaudited interim statements,  to the extent they may not
include footnotes or may be condensed or summary statements), and fairly present
in all  material  respects  the  financial  position  of  the  Company  and  its
subsidiaries  as of the dates  thereof  and the results of  operations  and cash
flows for the periods then ended (subject,  in the case of unaudited statements,
to normal year-end audit adjustments).

                                       31
<PAGE>

      Section  4.07.  No Material  Adverse  Change.  Except as  disclosed in the
Commission Documents,  since March 31, 2004, no event or series of events has or
have  occurred that would,  individually  or in the  aggregate,  have a Material
Adverse Effect on the Company.

      Section 4.08. No Undisclosed  Liabilities.  Neither the Company nor any of
its  subsidiaries has any  liabilities,  obligations,  claims or losses (whether
liquidated or unliquidated,  secured or unsecured, absolute, accrued, contingent
or  otherwise)  that would be required to be disclosed on a balance sheet of the
Company or any subsidiary  (including the notes thereto) in conformity with GAAP
and are not disclosed in the Commission Documents,  other than those incurred in
the ordinary course of the Company's or its subsidiaries  respective  businesses
since December 31, 2003, and which,  individually or in the aggregate, do not or
would not have a Material Adverse Effect on the Company.

      Section 4.09. No Undisclosed Events or Circumstances.  To the Knowledge of
the Company, no event or circumstance has occurred or exists with respect to the
Company  or  its  subsidiaries  or  their  respective  businesses,   properties,
operations  or  financial  condition,  which,  under  applicable  law,  rule  or
regulation,  requires public disclosure or announcement by the Company but which
has not been so publicly  announced or disclosed and which,  individually  or in
the  aggregate,  do not or  would  not have a  Material  Adverse  Effect  on the
Company.

      Section  4.10.  Actions  Pending.   There  is  no  action,   suit,  claim,
investigation  or  proceeding  pending  or,  to the  Knowledge  of the  Company,
threatened,  against the Company or any subsidiary  which questions the validity
of this Agreement or the transactions contemplated hereby or any action taken or
to be taken  pursuant  hereto or thereto.  Except as set forth in the Commission
Documents or on Schedule 4.10, there is no action, suit, claim, investigation or
proceeding pending or, to the Knowledge of the Company,  threatened,  against or
involving the Company,  any subsidiary of the Company or any of their respective
properties  or assets  that  could be  reasonably  expected  to have a  Material
Adverse Effect on the Company.  Except as set forth in the Commission  Documents
or on Schedule 4.10, no judgment, order, writ, injunction or decree or award has
been issued by or, so far as is known by the  Company,  requested  of any court,
arbitrator  or  governmental  agency  which might  result in a Material  Adverse
Effect.

      Section 4.11.  Compliance  with Law. The businesses of the Company and its
subsidiaries  have been and are presently being conducted in accordance with all
applicable  federal,  state and local governmental laws, rules,  regulations and
ordinances,  except as set forth in the Commission  Documents or such that would
not  reasonably be expected to cause a Material  Adverse  Effect.  Except as set
forth in the Commission Documents, the Company and each of its subsidiaries have
all franchises, permits, licenses, consents and other governmental or regulatory
authorizations  and  approvals  (collectively,  "Consents")  necessary  for  the
conduct  of  its  business  as  now  being  conducted  by it,  except  for  such
franchises,  permits,  licenses,  consents and other  governmental or regulatory
authorizations and approvals,  the failure to possess which,  individually or in
the  aggregate,  could not  reasonably  be expected  to have a Material  Adverse
Effect and no Consent  contains a restriction on the Company or its subsidiaries
that could reasonably be expected to have a Material Adverse Effect.

                                       32
<PAGE>

      Section  4.12.  Certain  Fees.  Except  as  expressly  set  forth  in this
Agreement, no brokers, finders or financial advisory fees or commissions will be
payable by the Company or any of its subsidiaries in respect of the transactions
contemplated by this Agreement.

      Section 4.13.  Disclosure.  To the best of the Company's Knowledge,  as of
their respective dates,  neither this Agreement nor the Schedules hereto nor the
Registration  Statement  or the Warrant (as any of the  foregoing  may have been
amended or supplemented after the date hereof) contain any untrue statement of a
material  fact or omit to state a material  fact  necessary in order to make the
statements made herein or therein, in the light of the circumstances under which
they were made herein or therein, not misleading.

      Section  4.14.  Material  Non-Public  Information.  As of the date hereof,
except for this Agreement and the transactions  contemplated hereby, neither the
Company nor its agents have  disclosed to the  Investor any material  non-public
information that,  according to applicable law, rule or regulation,  should have
been  disclosed  publicly by the Company  prior to the date hereof but which has
not been so disclosed.

      Section 4.15. Exemption from Registration;  Valid Issuances.  The issuance
and sale of the Shares,  the Warrant and the Warrant  Shares in accordance  with
the  terms,   conditions   and   limitations   of,  and  on  the  basis  of  the
representations and warranties set forth in, this Agreement, the Warrant and the
Registration  Rights  Agreement may be properly issued pursuant to Section 4(2),
Regulation D and/or any other  applicable  federal and state  securities or blue
sky laws and  regulations.  Neither the sales of the Shares,  the Warrant or the
Warrant Shares  pursuant to, nor the Company's  performance  of its  obligations
under,  this Agreement,  the Registration  Rights  Agreement or the Warrant,  as
applicable,  shall (i)  result  in the  creation  or  imposition  of any  liens,
charges, claims or other encumbrances upon the Shares, the Warrant Shares or any
of the  assets of the  Company or (ii)  except as  previously  disclosed  to the
Investor in writing,  entitle the holders of any  outstanding  shares of capital
stock of the Company to  preemptive  or other  rights to subscribe to or acquire
the shares of Common Stock or other securities of the Company.

      Section 4.16. No General  Solicitation  or  Advertising  in Regard to this
Transaction.  As of  the  date  hereof,  neither  the  Company  nor  any  of its
Affiliates  or any person  acting on its or their behalf (i) has  conducted  any
general  solicitation  (as that term is used in Rule 502(c) of  Regulation D) or
general  advertising  with  respect  to any of the  Shares,  the  Warrant or the
Warrant Shares or (ii) has made any offers or sales of any security or solicited
any  offers to buy any  security  under any  circumstances  that  would  require
registration of the Shares under the Securities Act.

      Section 4.17. No Integrated Offering.  Neither the Company, nor any of its
Affiliates,  nor any  person  acting on its or their  behalf  has,  directly  or
indirectly,  made any offers or sales of any security or solicited any offers to
buy any  security,  other than pursuant to this  Agreement and employee  benefit
plans, under circumstances that would require  registration under the Securities
Act of the  Shares  issuable  hereunder  with  any  other  offers  or  sales  of
securities of the Company.

                                       33
<PAGE>

                                   ARTICLE V

           REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE INVESTOR

      The Investor  hereby makes the following  representations,  warranties and
covenants to the Company:

      Section 5.01. Organization and Standing of the Investor. The Investor is a
company duly organized,  validly existing and in good standing under the laws of
the British Virgin Islands.

      Section  5.02.  Authorization  and Power.  The Investor has the  requisite
power and  authority  to enter  into and  perform  its  obligations  under  this
Agreement,  the Registration Rights Agreement and the Warrant and to purchase or
otherwise  receive the Shares,  the Warrant and the Warrant Shares in accordance
with the terms hereof. The execution, delivery and performance of this Agreement
by Investor and the consummation by it of the transactions  contemplated  hereby
have been duly  authorized by all  necessary  corporate  action,  and no further
consent or authorization of the Investor, its Board of Directors or stockholders
is required. This Agreement has been duly executed and delivered by the Investor
and  constitutes  a valid and binding  obligation  of the  Investor  enforceable
against the Investor in accordance with its terms, except as such enforceability
may be limited by applicable bankruptcy, insolvency, reorganization, moratorium,
liquidation,  conservatorship,  receivership  or similar  laws  relating  to, or
affecting  generally the  enforcement  of  creditor's  rights and remedies or by
other equitable principles of general application.

      Section 5.03. No Conflicts.  The  execution,  delivery and  performance of
this Agreement,  the Registration  Rights  Agreement,  the Warrant and any other
document or instrument contemplated hereby, by the Investor and the consummation
of the transactions contemplated thereby do not (i) violate any provision of the
Investor's  charter  documents or bylaws,  (ii)  conflict  with, or constitute a
default (or an event  which with notice or lapse of time or both would  become a
default)  under,  or  give to  others  any  rights  of  termination,  amendment,
acceleration  or  cancellation  of, any material  agreement,  mortgage,  deed of
trust, indenture, note, bond, license, lease agreement, instrument or obligation
to which the  Investor  is a party,  (iii)  create  or impose a lien,  charge or
encumbrance  on  any  property  of  the  Investor  under  any  agreement  or any
commitment to which the Investor is a party or by which the Investor is bound or
by which any of its respective  properties or assets are bound or (iv) result in
a violation of any federal,  state, local or foreign statute,  rule, regulation,
order,  judgment  or decree  (including  federal and state  securities  laws and
regulations) applicable to the Investor or by which any property or asset of the
Investor  are  bound or  affected,  except  in all  cases,  for such  conflicts,
defaults, terminations, amendments, accelerations,  cancellations and violations
as would not, individually or in the aggregate,  prohibit or otherwise interfere
with the ability of the Investor to enter into and perform its obligations under
this  Agreement in any  material  respect.  The  Investor is not required  under
federal,  state  or  local  law,  rule or  regulation  to  obtain  any  consent,
authorization or order of, or make any filing or registration with, any court or
governmental  agency in order for it to  execute,  deliver or perform any of its
obligations  under this  Agreement  or to purchase  the Shares or the Warrant in
accordance  with  the  terms  hereof;   provided,   that  for  purposes  of  the
representation made in this sentence,  the Investor is assuming and relying upon
the  accuracy of the  relevant  representations  and  agreements  of the Company
herein.

                                       34
<PAGE>

      Section 5.04. Financial Capability;  Accredited Investor. The Investor has
the financial capability to perform all of its obligations under this Agreement,
including  the  capability  to purchase the Shares,  the Warrant and the Warrant
Shares in  accordance  with the terms  hereof.  The  Investor is an  "Accredited
Investor" as defined in Rule 501 of  Regulation  D. The Investor is aware of the
Company's business affairs and financial condition and has had sufficient access
to and has  acquired  sufficient  information  about  the  Company  to  reach an
informed and knowledgeable  decision to acquire the Shares,  the Warrant and the
Warrant  Shares.  The Investor has such business and financial  experience as is
required  to give it the  capacity  to  utilize  the  information  received,  to
evaluate  the risks  involved  in  purchasing  the  Shares,  the Warrant and the
Warrant Shares,  to make an informed  decision about purchasing the Shares,  the
Warrant and the Warrant  Shares and to protect its own  interests in  connection
with the purchase of the Shares,  the Warrant and the Warrant Shares and is able
to bear the risks of an  investment  in the Shares,  the Warrant and the Warrant
Shares. The Investor is not an Affiliate of the Company.

      Section 5.05.  Information.  The Investor and its  advisors,  if any, have
been  furnished  with all  materials  relating  to the  business,  finances  and
operations  of the Company and  materials  relating to the offer and sale of the
Shares,  the Warrant and the Warrant  Shares  which have been  requested  by the
Investor.  The  Investor  and its  advisors,  if any,  have  been  afforded  the
opportunity  to ask  questions  of the  Company.  The  Investor  has sought such
accounting,  legal and tax  advice  as it has  considered  necessary  to make an
informed  investment decision with respect to its acquisition of the Shares, the
Warrant and the Warrant Shares.  The Investor  understands  that it (and not the
Company) shall be responsible  for its own tax  liabilities  that may arise as a
result of this investment or the transactions contemplated by this Agreement.

      Section 5.06. Selling Restrictions. The Investor covenants that during the
Commitment Period, neither the Investor nor any of its Affiliates nor any entity
managed by the Investor (i) will ever, through related parties or otherwise, (X)
purchase, trade, offer, pledge, sell, contract to sell or to purchase or sell or
"short" or "short  against the box" (as those terms are generally  understood in
the  securities  markets),  or otherwise  dispose of or acquire,  any derivative
securities of the Company or options in respect of such  securities,  including,
but not  limited  to, by way of option or equity  swap  transactions  in or with
respect  to  the  Company's  Common  Stock  or  any  other  derivative  security
transaction or (Y) upon receipt by the Investor of any Draw Down Notice from the
Company,  sell or  contract to sell any shares of Common  Stock  (other than any
shares of Common  Stock  purchased  by the  Investor  pursuant  to any Draw Down
Notice under this  Agreement)  until the end of the Draw Down Pricing Period set
forth in such Draw Down  Notice or (ii) will ever,  through  related  parties or
otherwise,  engage in any  transaction  intended to reduce the economic  risk of
ownership of shares of Common Stock (including, without limitation, the purchase
of any option or contract to sell) that would,  directly or indirectly,  have an
effect  substantially  equivalent  to selling  short such shares of Common Stock
that are subject to,  underlie or may be  deliverable  in  satisfaction  of such
transaction  or otherwise may be reasonably be expected to adversely  affect the
market price of the Common Stock.  For the sake of clarity,  the Investor  shall
have the right at any time,  including  during any Draw Down Pricing Period,  to
sell any shares of Common Stock  purchased by the Investor  pursuant to any Draw
Down Notice under this Agreement.

                                       35
<PAGE>

      Section 5.07. Statutory  Underwriter Status. The Investor acknowledges and
agrees  that,  pursuant  to  the  Commission's  current  interpretations  of the
Securities  Act, the Investor will be disclosed as an  "underwriter"  within the
meaning of the Securities Act in the Registration  Statement (and any amendments
or supplements  thereto) and in any Prospectus  contained  therein to the extent
required by applicable law.

      Section  5.08.   Compliance  with  Insider  Trading  Rules.  The  Investor
acknowledges  and agrees  that it is aware,  and that it will advise each of its
Affiliates and representatives that is provided any confidential  information of
the Company, that the United States securities laws and regulations provide that
any person who has received  directly or  indirectly  from an issuer such as the
Company  material,  non-public  information  is  prohibited  from  purchasing or
selling  securities of such issuer or from communicating such information to any
other person under circumstances in which it is reasonably foreseeable that such
person is likely to  purchase  or sell such  securities.  The  Investor  further
agrees not to provide any Person with material,  nonpublic  information received
from the Company or its  representatives,  including any relative,  associate or
other  individual who intends to, or may, (a) trade  securities  with respect to
the Company which is the subject of such  information or (b) otherwise  directly
or indirectly benefit from such information.

                                   ARTICLE VI

                            COVENANTS OF THE COMPANY

      The Company covenants to the Investor as follows,  which covenants are for
the sole  benefit  of the  Investor  and its  permitted  assignees  (as  defined
herein):

      Section 6.01. Securities.  The Company shall notify the Commission and the
Principal  Market,  if and as  applicable,  in  accordance  with their rules and
regulations,  of the transactions  contemplated by this Agreement, and shall use
commercially   reasonable  efforts  to  take  all  other  necessary  action  and
proceedings  as may be  required  and  permitted  by  applicable  law,  rule  or
regulation,  for the legal and valid  issuance  of the  Shares  and the  Warrant
Shares, if any, to the Investor.

      Section  6.02.  Reservation  of Common Stock.  As of the date hereof,  the
Company has available  and the Company  shall reserve and keep  available at all
times,  free of  preemptive  rights  and  other  similar  contractual  rights of
stockholders,  shares of Common Stock for the purpose of enabling the Company to
satisfy any  obligation  to issue the Shares in  connection  with all Draw Downs
contemplated  hereunder and the Warrant Shares. The number of shares so reserved
from time to time, as theretofore  increased or reduced as hereinafter provided,
may be reduced by the number of shares actually delivered hereunder.

      Section 6.03.  Registration and Listing. During the Commitment Period, the
Company  shall  use  commercially  reasonable  efforts:  (i) to take all  action
necessary to cause its Common Stock to continue to be  registered  under Section
12(b) or 12(g) of the Exchange Act; (ii) to comply in all material respects with
its  reporting  and filing  obligations  under the  Exchange  Act;  and (iii) to
prevent the termination or suspension such  registration,  or the termination or
suspension  of its reporting  and filing  obligations  under the Exchange Act or
Securities  Act (except as expressly  permitted  herein).  The Company shall use
commercially reasonable efforts necessary to maintain the listing and trading of
its Common Stock and the listing of the Shares  purchased by Investor  hereunder
on a Principal Market (including, without limitation, maintaining sufficient net
tangible  assets) and will comply in all material  respects  with the  Company's
reporting,  filing  and  other  obligations  under  the  bylaws  or rules of the
applicable Principal Market.

                                       36
<PAGE>

      Section 6.04. Registration Statement. Without the prior written consent of
the Investor, the Registration Statement shall be used solely in connection with
the transactions between the Company and the Investor contemplated hereby.

      Section 6.05. Compliance with Laws.

            (a) The Company shall, and cause each subsidiary to, comply,  in all
material respects, with all applicable laws, rules,  regulations and orders, the
noncompliance with which could reasonably be expected to have a Material Adverse
Effect.

            (b) Without the consent of its  stockholders  in accordance with the
rules of the applicable  Principal Market,  the Company will not be obligated to
issue,  and the Investor  will not be  obligated  to purchase,  any Shares which
would result in the issuance  under this Agreement of Shares  representing  more
than the  applicable  percentage  under  the rules of the  applicable  Principal
Market that would require stockholder approval of the issuance thereof.

      Section 6.06.  Reporting  Requirements.  Unless otherwise available to the
public by way of the Commission's  Electronic Document Gathering,  Analysis, and
Retrieval  system  ("EDGAR"),  upon  reasonable  written request of the Investor
during the Commitment  Period, the Company shall furnish copies of the following
to the Investor  within three  Trading Days of such request (but not sooner than
filed with or submitted to the Commission):

      (a)   Quarterly Reports on Form 10-Q;
      (b)   Annual Reports on Form 10-K;
      (c)   Periodic Reports on Form 8-K; and
      (d)   any  other  documents   publicly   furnished  or  submitted  to  the
            Commission.

      Section 6.07. Other Financing.  The Company may, without the prior written
consent of the Investor, (i) establish stock option or award plans or agreements
(for directors,  employees,  consultants and/or advisors),  and issue securities
thereunder, and amend such plans or agreements,  including increasing the number
of shares  available  thereunder,  (ii) use equity  securities  to  finance,  or
otherwise in connection  with, the  acquisition of one or more other  companies,
equipment, technologies or lines of business, (iii) issue shares of Common Stock
and/or  preferred stock in connection with the Company's  option or award plans,
stock purchase plans,  rights plans,  warrants or options,  (iv) issue shares of
Common  Stock and/or  Preferred  Stock in  connection  with the  acquisition  of
products,  licenses,  equipment  or other  assets  and  strategic  alliances  or
partnerships  or joint  ventures  (the primary  purpose of which is not to raise
equity  capital);   (v)  issue  shares  of  Common  and/or  Preferred  Stock  to
consultants and/or advisors as consideration for services  rendered,  (vi) issue
and sell equity or debt or hybrid  securities in a public offering,  (vii) issue
and sell equity or debt or hybrid  securities in a private placement (other than
in connection with any Prohibited  Transaction),  (viii) issue equity securities
to equipment lessors,  equipment vendors,  banks or similar lending institutions
in connection with leases or loans,  or in connection with strategic  commercial

                                       37
<PAGE>

or licensing  transactions,  (ix) issue  securities in connection with any stock
split, stock dividend,  recapitalization,  reclassification  or similar event by
the Company,  (x) issue  shares of Common Stock to the Investor  under any other
agreement  entered into between the Investor and the Company and (xi) enter into
any other  transaction that is not a Prohibited  Transaction  (each a "Permitted
Transaction").  The Company shall use commercially  reasonable efforts to notify
the Investor in writing  prior to the  consummation  of any  material  Permitted
Transaction described in clauses (vi), (vii) or (ix) above.

      Section 6.08. Prohibited Transactions.  During the term of this Agreement,
the Company shall not enter into any  Prohibited  Transaction  without the prior
written  consent of the  Investor,  which  consent  may be  withheld at the sole
discretion of the Investor;  provided, however, that the Investor agrees that it
will grant such consent if it determines in its sole discretion,  acting in good
faith,  that the Prohibited  Transaction is not reasonably  likely to materially
interfere with its rights and obligations  under this Agreement For the purposes
of this Agreement, the term "Prohibited Transaction" shall refer to the issuance
by the Company of any "future priced  securities," which shall be deemed to mean
the issuance of shares of Common Stock or securities of any type whatsoever that
are, or may become,  convertible  or  exchangeable  into shares of Common  Stock
where the  purchase,  conversion  or  exchange  price for such  Common  Stock is
determined  using any  floating or otherwise  adjustable  discount to the market
price of the Common Stock, including, without limitation, pursuant to any equity
line or other financing that is substantially  similar to the financing provided
under this Agreement; provided, however, that nothing in this Section 6.08 shall
prohibit the Company from  issuing any  securities  of any type that are, or may
become,  convertible or exchangeable into shares of Common Stock with a fixed or
determined purchase,  conversion or exchange price (and which may be accompanied
by  anti-dilution  provisions),  which  price may be at a discount to the market
price of Common Stock.

      Section  6.09.  Corporate  Existence.  The  Company  shall  take all steps
necessary  to preserve  and  continue  the  corporate  existence of the Company;
provided,  however,  that nothing in this Agreement  shall be deemed to prohibit
the  Company  from  engaging  in  any  merger,  consolidation,  sale  of  all or
substantially  all of its  assets or similar  transaction  with  another  Person
pursuant to which such other Person is the surviving entity in the transaction.

      Section  6.10.  Non-Disclosure  of Non-Public  Information.  Except as set
forth in Section 6.11 and 6.12,  none of the Company,  its officers,  directors,
employees  nor agents shall  disclose  material  non-public  information  to the
Investor, its advisors or representatives.

      Section 6.11. Notice of Certain Events Affecting Registration;  Suspension
of Right to Request a Draw Down. Notwithstanding the provisions of Section 6.10,
the Company shall immediately  notify the Investor upon the occurrence of any of
the following events in respect of the Registration  Statement or the Prospectus
related to the offer,  issuance  and sale of the Shares and the  Warrant  Shares
hereunder:  (i)  receipt  of  any  request  for  additional  information  by the
Commission  or any other  federal  or state  governmental  authority  during the
period  of  effectiveness  of  the  Registration  Statement  for  amendments  or
supplements to the Registration  Statement or the Prospectus;  (ii) the issuance
by the  Commission or any other federal or state  governmental  authority of any
stop order suspending the  effectiveness  of the  Registration  Statement or the
initiation  of any  proceedings  for  that  purpose;  or  (iii)  receipt  of any
notification  with respect to the suspension of the  qualification  or exemption
from  qualification  of  any of  the  Registrable  Securities  for  sale  in any
jurisdiction  or the  initiation  or  threatening  of any  proceeding  for  such
purpose.  The Company shall not request a Draw Down during the  continuation  of
any of the foregoing events.

                                       38
<PAGE>

      Section 6.12.  Amendments to the Registration  Statement.  Notwithstanding
the  provisions  set forth in Section  6.10,  if the  Registration  Statement is
declared  effective  by the  Commission,  the  Company  shall  not (i)  file any
amendment to the  Registration  Statement or make any amendment or supplement to
the Prospectus of which the Investor  shall not previously  have been advised or
to which the Investor shall reasonably  object after being so advised or (ii) so
long as, in the reasonable opinion of counsel for the Investor,  a Prospectus is
required to be delivered in connection with sales of the Shares by the Investor,
file any information,  documents or reports pursuant to the Exchange Act without
delivering  a copy of such  information,  documents  or reports to the  Investor
promptly following such filing unless such information, documents or reports are
available by way of EDGAR.

      Section 6.13. Prospectus Delivery. From time to time for such period as in
the  opinion of  counsel  for the  Investor  a  prospectus  is  required  by the
Securities  Act to be delivered in connection  with sales by the  Investor,  the
Company will  expeditiously  deliver to the Investor,  without  charge,  as many
copies of the  Prospectus  (and of any amendment or  supplement  thereto) as the
Investor  may  reasonably  request.  The  Company  consents  to  the  use of the
Prospectus  (and of any amendment or supplement  thereto) in accordance with the
provisions of the Securities Act and state  securities  laws in connection  with
the offering  and sale of the Shares and the Warrant  Shares and for such period
of time  thereafter as the  Prospectus is required by the  Securities  Act to be
delivered in connection with sales of the Shares and the Warrant Shares.

                                  ARTICLE VII

       CONDITIONS TO THE OBLIGATION OF THE INVESTOR TO ACCEPT A DRAW DOWN

The  obligation  of the  Investor  hereunder to accept a Draw Down Notice and to
acquire  and pay for the  Shares  in  accordance  therewith  is  subject  to the
satisfaction  or waiver,  at each  Condition  Satisfaction  Date, of each of the
conditions set forth below.  The conditions are for the Investor's  sole benefit
and may be waived by the Investor at any time in its sole discretion. As used in
this Agreement,  the term "Condition Satisfaction Date" shall mean, with respect
to each  Draw  Down,  the date on which  the  applicable  Draw  Down  Notice  is
delivered to the Investor and each  Settlement Date in respect of the applicable
Draw Down Pricing Period.

      Section 7.01.  Accuracy of the Company's  Representations  and Warranties.
Each of the  representations  and  warranties  of the Company in this  Agreement
shall be true and correct in all  material  respects as though made on and as of
such Condition Satisfaction Date, except for such representations and warranties
that are expressly made as of a particular date.

      Section  7.02.   Performance  by  the  Company.  The  Company  shall  have
performed,  satisfied and complied in all material  respects with all covenants,
agreements and conditions  required by this Agreement,  the Registration  Rights
Agreement and the Warrant  required to be performed,  satisfied or complied with
by the Company as of or prior to the applicable Condition Satisfaction Date.

                                       39
<PAGE>

      Section 7.03.  Compliance with Law. The Company shall have complied in all
material  respects with all  applicable  federal,  state and local  governmental
laws,  rules,  regulations  and  ordinances  in connection  with the  execution,
delivery  and  performance  of  this  Agreement  and  the  consummation  of  the
transactions contemplated hereby.

      Section 7.04. Effective Registration Statement. Upon the terms and subject
to  the  conditions  and  limitations  set  forth  in  the  Registration  Rights
Agreement, the Registration Statement shall have previously become effective and
shall remain  effective and (i) neither the Company nor the Investor  shall have
received  notice that the Commission has issued or intends to issue a stop order
with respect to the Registration  Statement or that the Commission otherwise has
suspended or withdrawn the effectiveness of the Registration  Statement,  either
temporarily  or  permanently,  or intends or has threatened to do so (unless the
Commission's  concerns  have  been  addressed  and the  Investor  is  reasonably
satisfied  that the  Commission no longer is considering or intends to take such
action),  and  (ii)  no  other  suspension  of  the  use  or  withdrawal  of the
effectiveness of the Registration Statement or the Prospectus shall exist.

      Section  7.05.  No  Knowledge.  The Company shall have no Knowledge of any
event  more  likely  than not to have the  effect of  causing  the  Registration
Statement  with  respect  to the  resale of the  Registrable  Securities  by the
Investor to be suspended or  otherwise  ineffective  (which event is more likely
than not to occur within  fifteen (15) Trading Days following the Trading Day on
which a Draw Down Notice is delivered).

      Section  7.06. No  Suspension.  Trading in the Common Stock shall not have
been suspended by the Commission or the applicable  Principal Market and trading
in securities generally as reported on the applicable Principal Market shall not
have been suspended or limited.

      Section 7.07.  No  Injunction.  No statute,  rule,  regulation,  executive
order,  decree,   ruling  or  injunction  shall  have  been  enacted,   entered,
promulgated  or endorsed by any court or  governmental  authority  of  competent
jurisdiction  which  prohibits  the  consummation  of any  of  the  transactions
contemplated by this Agreement.

      Section 7.08. No Proceedings or Litigation.  No action, suit or proceeding
before any arbitrator or any  governmental  authority shall have been commenced,
and no investigation  by any governmental  authority shall have been threatened,
against the Company or any  subsidiary,  or any of the  officers,  directors  or
Affiliates of the Company or any subsidiary seeking to enjoin, prevent or change
the transactions contemplated by this Agreement.

      Section 7.09.  Section 16 Limitation.  On each Settlement Date, the number
of Shares then to be purchased  by the  Investor  shall not exceed the number of
such shares that,  when aggregated  with all other  Registrable  Securities then
owned by the Investor beneficially or deemed beneficially owned by the Investor,
would result in the  Investor  owning more than 9.9% of all of such Common Stock
as would be  outstanding  on such  Settlement  Date, as determined in accordance
with Section 16 of the Exchange  Act. For purposes of this Section  7.09, in the
event that the amount of Common Stock  outstanding  as  determined in accordance

                                       40
<PAGE>

with Section 16 of the Exchange Act and the regulations  promulgated  thereunder
is greater on a Settlement Date than on the date upon which the Draw Down Notice
associated  with such  Settlement  Date is  given,  the  amount of Common  Stock
outstanding  on such  Settlement  Date shall govern for purposes of  determining
whether the  Investor,  when  aggregating  all  purchases  of Common  Stock made
pursuant to this Agreement and, if any, Warrant Shares, would own more than 9.9%
of the Common Stock following such Settlement Date.

      Section 7.10.  Sufficient Shares Registered for Resale.  The Company shall
have sufficient  Shares,  calculated using the closing trade price of the Common
Stock as of the  Trading  Day  immediately  preceding  such  Draw  Down  Notice,
registered  under  the  Registration  Statement  to issue  and  sell the  Shares
purchased in connection with each Draw Down Notice.

      Section  7.11.  Warrant.  The  Warrant  shall  have  been  duly  executed,
delivered and issued to the Investor, and the Company shall not be in default in
any material  respect  under any of the  provisions  thereof,  provided that any
refusal by or failure of the  Company  to issue and  deliver  Warrant  Shares in
respect  of any  exercise  (in whole or in part)  thereof  shall be deemed to be
material for the purposes of this Section 7.11.

      Section  7.12.  Opinion of Counsel.  The Investor  shall have  received an
opinion of counsel to the  Company,  dated as of the Closing  Date,  in form and
substance reasonably  satisfactory to the Investor and its counsel substantially
in the form attached hereto as Exhibit D.

                                  ARTICLE VIII

                                    LEGENDS

      Section 8.01.  Legends.  Unless otherwise provided below, each certificate
representing   Registrable  Securities  will  bear  the  following  legend  (the
"Legend"):

          THE SECURITIES  EVIDENCED BY THIS  CERTIFICATE HAVE NOT BEEN
          REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED
          (THE "SECURITIES  ACT"), OR ANY OTHER APPLICABLE  SECURITIES
          LAWS AND HAVE BEEN ISSUED IN RELIANCE UPON AN EXEMPTION FROM
          THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH
          OTHER  SECURITIES  LAWS.   NEITHER  THIS  SECURITY  NOR  ANY
          INTEREST OR  PARTICIPATION  HEREIN MAY BE  REOFFERED,  SOLD,
          ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED,  HYPOTHECATED OR
          OTHERWISE  DISPOSED  OF,  EXCEPT  PURSUANT  TO AN  EFFECTIVE
          REGISTRATION  STATEMENT UNDER THE SECURITIES ACT OR PURSUANT
          TO A  TRANSACTION  THAT IS EXEMPT  FROM,  OR NOT SUBJECT TO,
          SUCH  REGISTRATION.  THE HOLDER OF THIS  CERTIFICATE  IS THE
          BENEFICIARY OF CERTAIN  OBLIGATIONS OF THE COMPANY SET FORTH
          IN A  COMMON  STOCK  PURCHASE  AGREEMENT  BETWEEN  DISCOVERY
          LABORATORIES, INC., AND KINGSBRIDGE CAPITAL LIMITED DATED AS
          OF JULY 7,  2004.  A COPY OF THE  PORTION  OF THE  AFORESAID
          AGREEMENT  EVIDENCING SUCH  OBLIGATIONS MAY BE OBTAINED FROM
          THE COMPANY'S EXECUTIVE OFFICES.

                                  41
<PAGE>

As soon as practicable after the execution and delivery hereof, but in any event
within five (5) Trading Days thereafter, the Company shall issue to the transfer
agent for its Common Stock (and to any substitute or replacement  transfer agent
for its Common Stock upon the Company's  appointment  of any such  substitute or
replacement transfer agent) instructions, with a copy to the Investor. It is the
intent and purpose of such  instructions,  as provided  therein,  to require the
transfer  agent  for  the  Common  Stock  from  time to time  upon  transfer  of
Registrable  Securities by the Investor to issue  certificates  evidencing  such
Registrable Securities free of the Legend during the following periods and under
the following  circumstances and without consultation by the transfer agent with
the  Company or its  counsel  and  without  the need for any  further  advice or
instruction or documentation to the transfer agent by or from the Company or its
counsel or the Investor,  unless an opinion of Investor's  counsel is reasonably
required by the transfer agent or the Company:

            (a) At any time after the Closing Date to the extent  accompanied by
a notice requesting the issuance of certificates  free of the Legend;  provided,
that (i) the Company is  reasonably  able to confirm to the transfer  agent that
the  Registration  Statement  shall  then be  effective  and (ii) if  reasonably
requested by the transfer agent the Investor confirms to the transfer agent that
the Investor has complied with the  prospectus  delivery  requirement  under the
Securities Act.

            (b) At any  time  upon  any  surrender  of one or more  certificates
evidencing   Registrable   Securities  that  bear  the  Legend,  to  the  extent
accompanied by a notice  requesting the issuance of new certificates free of the
Legend to replace those surrendered and containing  representations that (i) the
Investor  is  permitted  to  dispose  of  such  Registrable  Securities  without
limitation  as to amount or manner of sale  pursuant  to Rule  144(k)  under the
Securities  Act and  there is no  requirement  for the  Investor  to  deliver  a
prospectus or (ii) the Investor has sold,  pledged or otherwise  transferred  or
agreed to sell,  pledge or otherwise  transfer such Registrable  Securities in a
manner  other  than  pursuant  to  an  effective  registration  statement,  to a
transferee  who  shall  upon  such  transfer  be  entitled  to  freely  tradable
securities.

      Section 8.02. No Other Legend or Stock  Transfer  Restrictions.  No legend
other than the one  specified in Section 8.01 has been or shall be placed on the
share  certificates  representing the Common Stock issued to the Investor and no
instructions or "stop transfer orders," so called "stock transfer restrictions,"
or other  restrictions  have  been or shall be given to the  Company's  transfer
agent with respect  thereto  other than as  expressly  set forth in this Article
VIII.

                                   ARTICLE IX

                                  TERMINATION

      Section 9.01. Term. Unless otherwise terminated in accordance with Section
9.02 below, this Agreement shall terminate upon the expiration of the Commitment
Period.

                                       42
<PAGE>

      Section 9.02. Other Termination.

            (a) The Investor may terminate this Agreement upon (x) one (1) day's
notice if the Company  enters into any  Prohibited  Transaction  as set forth in
Section 6.08 without the Investor's prior written consent,  or (y) one (1) day's
notice within ten (10) Trading Days after the Investor  obtains actual knowledge
that an event  resulting in a Material  Adverse  Effect has occurred;  provided,
however,  that the  Investor  shall be deemed to possess  such actual  knowledge
within five (5) Trading Days after such event has been publicly disclosed by the
Company  in  accordance  with its  periodic  reporting  requirements  under  the
Exchange Act.

            (b) The Investor may  terminate  this  Agreement  upon one (1) day's
notice to the Company at any time in the event that the  Registration  Statement
is not declared effective in accordance with the Registration Rights Agreement.

            (c) The  Company may  terminate  this  Agreement  upon one (1) day's
notice;  provided,  however, that the Company shall not terminate this Agreement
pursuant to this Section 9.02(c) during any Draw Down Pricing Period;  provided,
further,  that in the event of any  termination of this Agreement by the Company
hereunder,  so long as the  Investor  owns  Shares  purchased  hereunder  and/or
Warrant  Shares,  unless all of such shares of Common Stock may be resold by the
Investor without registration and without any time, volume or manner limitations
pursuant  to Rule  144(k) (or any similar  provision  then in effect)  under the
Securities  Act,  the Company  shall not suspend or  withdraw  the  Registration
Statement or otherwise cause the Registration  Statement to become  ineffective,
or  voluntarily  delist the Common Stock from the applicable  Principal  Market,
without listing the Common Stock on another Principal Market.

            (d) Each of the parties hereto may terminate this Agreement upon one
(1) day's  notice if the other  party has  breached a  material  representation,
warranty or covenant to this  Agreement  and such breach is not remedied  within
ten (10) Trading Days after notice of such breach is delivered to the  breaching
party.

            (e) The  obligation  of the  Investor to  purchase  shares of Common
Stock shall  terminate  permanently in the event that there shall occur any stop
order or  suspension  of  effectiveness  of the  Registration  Statement  for an
aggregate of thirty (30) calendar days during the Commitment Period.

            (f) In the event of  termination  by the  Company  or the  Investor,
written  notice  thereof  shall  forthwith  be given to the other  party and the
transactions  contemplated by this Agreement shall be terminated without further
action by either party.  If this  Agreement is terminated as provided in Section
9.01 or 9.02 herein,  this  Agreement  shall become void and of no further force
and effect,  except as provided in Section  12.14.  Nothing in this Section 9.03
shall be deemed to release the Company or the Investor  from any  liability  for
any breach  under this  Agreement or to impair the rights of the Company and the
Investor to compel  specific  performance by the other party of its  obligations
under this Agreement.

                                       43
<PAGE>

                                   ARTICLE X

                                INDEMNIFICATION

      Section 10.01. Indemnification.

            (a) Except as otherwise  provided in this Article X, unless disputed
as set forth in Section 10.02, the Company agrees to indemnify,  defend and hold
harmless  the  Investor  and  its  Affiliates  and  their  respective  officers,
directors,  agents, employees,  subsidiaries,  partners, members and Controlling
persons (each, an "Investor Indemnified Party"), to the fullest extent permitted
by law from and against any and all Damages directly  resulting from or directly
arising  out of any  breach  of any  representation  or  warranty,  covenant  or
agreement by the Company in this Agreement, the Registration Rights Agreement or
the Warrant; provided,  however, that the Company shall not be liable under this
Article X to an  Investor  Indemnified  Party to the  extent  that such  Damages
resulted  or arose  from the  breach  by an  Investor  Indemnified  Party of any
representation, warranty, covenant or agreement of an Investor Indemnified Party
contained in this Agreement, the Registration Rights Agreement or the Warrant or
the  gross  negligence,  recklessness,  willful  misconduct  or bad  faith of an
Investor  Indemnified  Party.  The parties  intend  that any Damages  subject to
indemnification  pursuant to this  Article X will be net of  insurance  proceeds
(which the  Investor  Indemnified  Party agrees to use  commercially  reasonable
efforts to  recover).  Accordingly,  the amount which the Company is required to
pay to any Investor  Indemnified Party hereunder (a "Company Indemnity Payment")
will be reduced by any insurance  proceeds actually recovered by or on behalf of
any Investor Indemnified Party in reduction of the related Damages. In addition,
if an Investor  Indemnified  Party receives a Company Indemnity Payment required
by this Article X in respect of any Damages and  subsequently  receives any such
insurance proceeds,  then the Investor Indemnified Party will pay to the Company
an amount equal to the Company Indemnity Payment received less the amount of the
Company Indemnity Payment that would have been due if the insurance proceeds had
been received,  realized or recovered before the Company  Indemnity  Payment was
made.

            (b) Except as otherwise  provided in this Article X, unless disputed
as set forth in Section 10.02, the Investor agrees to indemnify, defend and hold
harmless the Company and its  subsidiaries  and Affiliates and their  respective
officers,  directors,  agents, employees,  subsidiaries,  partners,  members and
Controlling persons (each, a "Company Indemnified Party"), to the fullest extent
permitted by law from and against any and all Damages directly resulting from or
arising  out of any  breach  of any  representation  or  warranty,  covenant  or
agreement by the Investor in this Agreement, the Registration Right Agreement or
the Warrant; provided, however, that the Investor shall not be liable under this
Article  X to a  Company  Indemnified  Party to the  extent  that  such  Damages
resulted  or  arose  from  the  breach  by a  Company  Indemnified  Party of any
representation,  warranty,  covenant or agreement of a Company Indemnified Party
contained in this Agreement,  the Registration Right Agreement or the Warrant or
gross  negligence,  recklessness,  willful  misconduct or bad faith of a Company
Indemnified   Party.   The  parties   intend   that  any   Damages   subject  to
indemnification  pursuant to this  Article X will be net of  insurance  proceeds
(which the Company agrees to use  commercially  reasonable  efforts to recover).
Accordingly,  the amount  which the  Investor  is required to pay to any Company
Indemnified Party hereunder (an "Investor Indemnity Payment") will be reduced by
any insurance  proceeds  theretofore  actually  recovered by or on behalf of any
Company Indemnified Party in reduction of the related Damages. In addition, if a
Company Indemnified Party receives a Investor Indemnity Payment required by this
Article X in respect of any Damages and  subsequently  receives  insurance  such
proceeds,  then the Company Indemnified Party will pay to the Investor an amount
equal to the Investor Indemnity Payment received less the amount of the Investor
Indemnity  Payment that would have been due if the  insurance  proceeds had been
received, realized or recovered before the Investor Indemnity Payment was made.

                                       44
<PAGE>

      Section  10.02.  Notification  of Claims for  Indemnification.  Each party
entitled to indemnification under this Article X (an "Indemnified Party") shall,
promptly  after the receipt of notice of the  commencement  of any claim against
such  Indemnified  Party in respect of which  indemnity  may be sought  from the
party  obligated to indemnify such  Indemnified  Party under this Article X (the
"Indemnifying  Party"),   notify  the  Indemnifying  Party  in  writing  of  the
commencement  thereof.  Any such notice shall  describe the claim in  reasonable
detail. The failure of any Indemnified Party to so notify the Indemnifying Party
of any such action shall not relieve the  Indemnifying  Party from any liability
which it may have to such  Indemnified  Party (a) other  than  pursuant  to this
Article X or (b) under this Article X unless,  and only to the extent that, such
failure results in the Indemnifying  Party's forfeiture of substantive rights or
defenses or the  Indemnifying  Party is prejudiced by such delay. The procedures
listed below shall  govern the  procedures  for the handling of  indemnification
claims.

            (a) Any claim for  indemnification  for  Damages  that do not result
from a Third  Party  Claim  as  defined  in the  following  paragraph,  shall be
asserted by written notice given by the  Indemnified  Party to the  Indemnifying
Party. Such Indemnifying Party shall have a period of thirty (30) days after the
receipt of such notice  within which to respond  thereto.  If such  Indemnifying
Party does not respond  within such  thirty (30) day period,  such  Indemnifying
Party shall be deemed to have refused to accept  responsibility  to make payment
as set forth in Section  10.01.  If such  Indemnifying  Party  does not  respond
within such  thirty  (30) day period or rejects  such claim in whole or in part,
the Indemnified Party shall be free to pursue such remedies as specified in this
Agreement,  including  the dispute  resolution  provisions  set forth in Section
10.03 below.

            (b) If an Indemnified  Party shall receive notice or otherwise learn
of the  assertion  by a person or entity  not a party to this  Agreement  of any
threatened  legal action or claim  (collectively  a "Third Party  Claim"),  with
respect  to  which  an   Indemnifying   Party  may  be   obligated   to  provide
indemnification,  the  Indemnified  Party  shall  give such  Indemnifying  Party
written  notice  thereof  within twenty (20) days after  becoming  aware of such
Third Party Claim.

            (c) An  Indemnifying  Party  may elect to defend  (and,  unless  the
Indemnifying  Party has specified any  reservations  or  exceptions,  to seek to
settle or  compromise)  at such  Indemnifying  Party's  own  expense and by such
Indemnifying Party's own counsel, any Third Party Claim. Within thirty (30) days
after the receipt of notice from an  Indemnified  Party (or sooner if the nature
of such Third Party Claim so requires),  the Indemnifying Party shall notify the
Indemnified Party whether the Indemnifying Party will assume  responsibility for
defending such Third Party Claim,  which election shall specify any reservations
or exceptions.  If such  Indemnifying  Party does not respond within such thirty
(30) day period or rejects such claim in whole or in part, the Indemnified Party
shall be free to pursue such remedies as specified in this Agreement,  including
the dispute resolution  provisions set forth in Section 10.03 below. In case any
such Third Party Claim shall be brought  against any Indemnified  Party,  and it
shall  notify  the  Indemnifying   Party  of  the  commencement   thereof,   the

                                       45
<PAGE>

Indemnifying  Party shall be  entitled to assume the defense  thereof at its own
expense,  with counsel  satisfactory to such Indemnified Party in its reasonable
judgment; provided, however, that any Indemnified Party may, at its own expense,
retain  separate  counsel to  participate  in such  defense at its own  expense.
Notwithstanding  the  foregoing,  in any  Third  Party  Claim in which  both the
Indemnifying  Party,  on the one hand,  and an Indemnified  Party,  on the other
hand, are, or are reasonably  likely to become, a party,  such Indemnified Party
shall have the right to employ  separate  counsel and to control its own defense
of such claim if, in the  reasonable  opinion  of  counsel  to such  Indemnified
Party,  either  (x)  one or  more  significant  defenses  are  available  to the
Indemnified  Party that are not  available  to the  Indemnifying  Party or (y) a
conflict or potential conflict exists between the Indemnifying Party, on the one
hand,  and such  Indemnified  Party,  on the other  hand,  that  would make such
separate representation advisable; provided, however, that in such circumstances
the Indemnifying Party (i) shall not be liable for the fees and expenses of more
than one  counsel  to all  Indemnified  Parties  and (ii)  shall  reimburse  the
Indemnified  Parties  for such  reasonable  fees and  expenses  of such  counsel
incurred in any such Third Party Claim, as such expenses are incurred,  provided
that the  Indemnified  Parties  agree to repay such amounts if it is  ultimately
determined   that  the   Indemnifying   Party  was  not   obligated  to  provide
indemnification under this Article X. The Indemnifying Party agrees that it will
not,  without  the prior  written  consent  of the  Indemnified  Party,  settle,
compromise  or consent to the entry of any judgment in any pending or threatened
claim relating to the matters contemplated hereby (if any Indemnified Party is a
party thereto or has been actually threatened to be made a party thereto) unless
such settlement, compromise or consent includes an unconditional release of such
Indemnified  Party  from all  liability  arising  or that may  arise out of such
claim.  The  Indemnifying  Party shall not be liable for any  settlement  of any
claim effected  against an Indemnified  Party without the  Indemnifying  Party's
written consent, which consent shall not be unreasonably  withheld,  conditioned
or delayed.  The rights  accorded to an Indemnified  Party hereunder shall be in
addition  to any rights  that any  Indemnified  Party may have at common law, by
separate agreement or otherwise (subject,  however, to the provisions of Section
10.03 below); provided,  however, that notwithstanding the foregoing or anything
to the contrary  contained in this  Agreement,  nothing in this Article X (other
than  Section  10.03)  shall  restrict or limit any rights that any  Indemnified
Party may have to seek equitable relief.

                                   ARTICLE XI

                                  ARBITRATION

      Section  11.01.  Arbitration.   Any  dispute  under  this  Agreement,  the
Registration  Rights  Agreement or the Warrant shall be submitted to arbitration
(including,  without limitation,  pursuant to this Article X) by sending written
notice  of  such  election  to  the  other  party  or  parties   clearly  marked
"Arbitration  Demand".  Thereupon such dispute shall be arbitrated in accordance
with the terms and conditions of this Article XI. Notwithstanding the foregoing,
either party, subject to the terms,  conditions and provisions of Section 12.12,
may  apply to a court of  competent  jurisdiction  for a  temporary  restraining
order, a preliminary injunction or other equitable relief to preserve the status
quo or prevent irreparable harm.

      Section 11.02. Board of Arbitration.  Each of the Company and the Investor
shall  select one (1) member of the Board of  Arbitration  and the third  member
shall be  selected by mutual  agreement  of the other  members,  or if the other
members fail to reach  agreement on a third member within twenty (20) days after
their selection,  such third member shall thereafter be selected by the American
Arbitration  Association  upon application made to it for such purpose by either
party to this Agreement.

                                       46
<PAGE>

      Section 11.03.  Counterclaims.  Nothing  contained herein shall operate to
prevent either party from asserting counterclaim(s) in any arbitration commenced
in accordance with this  Agreement,  and any such party need not comply with the
procedural   provisions   of  this   Article   XI  in  order  to   assert   such
counterclaim(s).

      Section 11.04. Procedures.  The arbitration shall be filed with the office
of the American Arbitration Association ("AAA") located in Wilmington,  Delaware
or such other AAA office as the parties may agree upon  (without any  obligation
to so agree).  The  arbitration  shall be conducted  pursuant to the  Commercial
Arbitration  Rules of AAA as in effect at the time of the  arbitration  hearing,
such arbitration to be completed in a 60-day period. In addition,  the following
rules and procedures shall apply to the arbitration:

            (a) The Board of Arbitration shall meet on consecutive business days
in the city in which the  arbitration  was filed,  and shall  reach and render a
decision (concurred in by a majority of the members of the Board of Arbitration)
which shall be in writing and state the  findings the facts and  conclusions  of
law upon  which the  decision  is based,  shall be final  and  binding  upon the
parties,  who shall forthwith comply after receipt  thereof.  In connection with
rendering its decisions,  the Board of  Arbitration  shall adopt and follow such
rules and  procedures  as a majority of the members of the Board of  Arbitration
deems necessary or appropriate. To the extent practical,  decisions of the Board
of  Arbitration  shall be  rendered  no more  than  thirty  (30)  calendar  days
following  commencement  of  proceedings  with  respect  thereto.  The  Board of
Arbitration  shall cause its written  decision  to be  delivered  to the parties
hereto that are involved in such arbitration.  Any decision made by the Board of
Arbitration  (either  prior to or  after  the  expiration  of such  thirty  (30)
calendar day period) shall be final,  binding and conclusive on the  Indemnified
Party and the  Indemnifying  Party and  entitled  to be  enforced to the fullest
extent permitted by law and entered in any court of competent jurisdiction. Each
party submits  itself to the  jurisdiction  of any such court,  but only for the
entry and enforcement to judgment with respect to the decision of the arbitrator
hereunder.

            (b) The Board of Arbitration shall have the sole authority to decide
whether or not any dispute  between the  parties is  arbitrable  and whether the
party  presenting  the issues to be  arbitrated  has  satisfied  the  conditions
precedent  to such  party's  right to commence  arbitration  as required by this
Article XI.

            (c) The Board of Arbitration shall have the power to grant all legal
and equitable remedies (including, without limitation, specific performance) and
award  compensatory  damages  provided by applicable law, but shall not have the
power or  authority  to award  punitive  damages.  No party shall seek  punitive
damages in relation to any matter under,  arising out of, or in connection  with
or relating to this Agreement in any other forum.

            (d) Each  party to any  arbitration  shall  bear its own  expense in
relation thereto,  including but not limited to such party's attorneys' fees, if
any,  and the  expenses  and  fees of the  Board  of  Arbitration  shall be paid
initially one-half by each of the Company and the Investor, but then apportioned
between the Company and the  Investor in the same  proportion  as the portion of

                                       47
<PAGE>

the related claim  determined by the Board of  Arbitration  to be payable to the
injured  party  bears  to the  portion  of such  claim  determined  not to be so
payable;  provided,  however,  that each party shall bear the costs  incurred in
connection  with any dispute brought by such party that the Board of Arbitration
determines to have been brought in bad faith.

            (e) Except as provided in the last  sentence of Section  11.01,  the
provisions of this Article XI shall be a complete defense to any suit, action or
proceeding  instituted  in any  federal,  state or local  court  or  before  any
administrative  tribunal with respect to any dispute arising with regard to this
Agreement.  Any party commencing a lawsuit in violation of this Article XI shall
pay the costs of the other  party,  including,  without  limitation,  reasonable
attorney's fees and defense costs.


                                  ARTICLE XII

                                 MISCELLANEOUS

      Section 12.01. Fees and Expenses.  The Company shall be solely responsible
for (i) all reasonable  attorneys fees and expenses  incurred by the Investor in
connection  with the  preparation,  negotiation,  execution and delivery of this
Agreement,  the Registration Rights Agreement and the Warrant up to an aggregate
maximum of  $40,000,  (ii) all  reasonable  fees and  expenses  incurred  by the
Investor in connection  with any  amendments,  modifications  or waivers of this
Agreement or incurred in  connection  with the  Investor's  enforcement  of this
Agreement,  including,  without  limitation,  all reasonable  attorneys fees and
expenses,  (iii) all reasonable due diligence  expenses incurred by the Investor
during the term of this  Agreement up to aggregate  maximum amount of $7,500 per
calendar quarter; provided,  however, that the payments set forth in this clause
(iii)  shall  not apply if the  Company  sells  shares  of  Common  Stock to the
Investor  with an  aggregate  purchase  price  equal  to at  least  $10,000,000;
provided,  further,  that upon the Company selling shares of Common Stock to the
Investor with an aggregate  purchase  price equal to at least  $10,000,000,  the
Investor  shall  promptly  refund to the Company any amounts that were  actually
paid to the  Investor  prior to such date,  and (iv) all stamp or other  similar
taxes and  duties,  if any,  levied in  connection  with  issuance of the Shares
pursuant  hereto;  provided,  however,  that in each of the above  instances the
Investor shall provide customary supporting invoices or similar documentation in
reasonable  detail  describing  such expenses.  The Investor shall reimburse all
reasonable  due diligence  expenses  incurred by the Company in connection  with
this transaction prior to the date of this Agreement.

      Section 12.02. Reporting Entity for the Common Stock. The reporting entity
relied upon for the  determination of the trading price or trading volume of the
Common Stock on any given Trading Day for the purposes of this  Agreement  shall
be  Bloomberg  or any  successor  thereto.  The  written  mutual  consent of the
Investor and the Company shall be required to employ any other reporting entity.

      Section 12.03. Acknowledgement Regarding the Investor's Purchase of Shares
The Investor is acting  solely in the capacity of an arm's length  investor with
respect to this Agreement and the transactions contemplated hereby. The Investor
is not acting as a  financial  advisor or  fiduciary  of the  Company (or in any
similar   capacity)  with  respect  to  this  Agreement  and  the   transactions

                                       48
<PAGE>

contemplated  hereby  and  any  advice  given  by  the  Investor  or  any of its
representatives or agents in connection with this Agreement and the transactions
contemplated  hereby is merely  incidental  to the  Investor's  purchase  of the
Shares  and may not be relied  upon by the  Company  for any  reason;  provided,
however,  that  the  Company  may  rely  upon the  express  representations  and
warranties given by the Investor under this Agreement.

      Section 12.04.  Brokerage.  Each of the parties hereto  represents that it
has had no  dealings  in  connection  with this  transaction  with any finder or
broker who will demand  payment of any fee or  commission  from the other party.
The  Company on the one hand,  and the  Investor,  on the other  hand,  agree to
indemnify  the  other  against  and hold  the  other  harmless  from any and all
liabilities to any Persons  claiming  brokerage  commissions or finder's fees on
account  of  services   purported  to  have  been  rendered  on  behalf  of  the
indemnifying  party  in  connection  with  this  Agreement  or the  transactions
contemplated hereby.

      Section  12.05.  Notices.  All  notices,  demands,   requests,   consents,
approvals,  and other communications required or permitted hereunder shall be in
writing and, unless otherwise specified herein,  shall be (i) personally served,
(ii) deposited in the mail,  registered or certified,  return receipt requested,
postage  prepaid,  (iii) delivered by reputable air courier service with charges
prepaid or (iv) transmitted by hand delivery,  telegram or facsimile,  addressed
as set forth below or to such other  address as such party shall have  specified
most  recently by written  notice given in  accordance  herewith.  Any notice or
other communication  required or permitted to be given hereunder shall be deemed
effective  (a) upon hand  delivery  or  delivery  by  facsimile,  with  accurate
confirmation  generated by the transmitting facsimile machine, at the address or
number  designated  below (if delivered on a business day during normal business
hours where such notice is to be received),  or the first business day following
such delivery (if delivered  other than on a business day during normal business
hours where such notice is to be  received)  or (b) on the second  business  day
following  the date of  mailing  by  express  courier  service,  fully  prepaid,
addressed to such address,  or upon actual  receipt of such  mailing,  whichever
shall first occur. The addresses for such communications shall be:

      If to the Company:

      Discovery Laboratories, Inc.
      350 South Main Street
      Suite 307
      Doylestown, Pennsylvania  18901
      Telephone: (215) 340-4699
      Facsimile: (215) 340-3940
      Attention: Chief Financial Officer and General Counsel

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<PAGE>

with a copy (which shall not constitute notice) to:

      Dickstein Shapiro Morin & Oshinsky LLP
      1177 Avenue of the Americas, 41st Floor
      New York, NY 10036-2714
      Telephone: (212) 835-1400
      Facsimile: (212) 997-9880
      Attention: Ira L. Kotel

if to the Investor:

      Kingsbridge Capital Limited
      c/o Kingsbridge Corporate Services Limited
      Main Street
      Kilcullen, County Kildare
      Republic of Ireland
      Telephone: 011-353-45-481-811
      Facsimile: 011-353-45-482-003
      Attention: Adam Gurney, Managing Director

with a copy (which shall not constitute notice) to:

      Keith M. Andruschak, Esq.
      Clifford Chance US LLP
      31 West 52nd Street
      New York, NY  10019
      Telephone: (212) 878-8000
      Facsimile: (212) 878-8375

Either party hereto may from time to time change its address or facsimile number
for notices  under this Section by giving at least ten (10) days' prior  written
notice of such changed address or facsimile number to the other party hereto.

      Section  12.06.  Assignment.  Neither this Agreement nor any rights of the
Investor or the Company  hereunder  may be assigned by either party to any other
Person.

      Section 12.07.  Amendment; No Waiver. No party shall be liable or bound to
any other party in any manner by any  warranties,  representations  or covenants
except  as  specifically  set  forth in this  Agreement  or  therein.  Except as
expressly provided in this Agreement, neither this Agreement nor any term hereof
may be  amended,  waived,  discharged  or  terminated  other  than by a  written
instrument  signed by both  parties  hereto.  The failure of the either party to
insist on strict  compliance  with this  Agreement,  or to exercise any right or
remedy  under  this  Agreement,  shall not  constitute  a waiver  of any  rights
provided under this Agreement,  nor estop the parties from thereafter  demanding
full and  complete  compliance  nor prevent the parties from  exercising  such a
right or remedy in the future.

      Section 12.08. Entire Agreement.  This Agreement,  the Registration Rights
Agreement and the Warrant set forth the entire  agreement and  understanding  of
the parties  relating to the subject  matter hereof and supersedes all prior and
contemporaneous agreements, negotiations and understandings between the parties,
both oral and written, relating to the subject matter hereof.

                                       50
<PAGE>

      Section  12.09.  Severability.  In the event  that any  provision  of this
Agreement  becomes or is declared  by a court of  competent  jurisdiction  to be
illegal,  unenforceable or void, this Agreement shall continue in full force and
effect  without  said  provision;  provided,  that  such  severability  shall be
ineffective if it materially  changes the economic  benefit of this Agreement to
any party.

      Section 12.10. Title and Subtitles.  The titles and subtitles used in this
Agreement are used for the convenience of reference and are not to be considered
in construing or interpreting this Agreement.

      Section  12.11.  Counterparts.  This Agreement may be executed in multiple
counterparts,  each of which may be executed by less than all of the parties and
shall be deemed to be an original  instrument which shall be enforceable against
the parties actually executing such counterparts and all of which together shall
constitute one and the same instrument.

      Section 12.12.  Choice of Law. This Agreement shall be construed under the
laws of the State of New York.

      Section 12.13. Specific Enforcement, Consent to Jurisdiction.

            (a)  The  Company  and  the  Investor  acknowledge  and  agree  that
irreparable  damage would occur in the event that any of the  provisions of this
Agreement  were not performed in accordance  with their  specific  terms or were
otherwise breached.  It is accordingly agreed that the parties shall be entitled
to an injunction or injunctions to prevent or cure breaches of the provisions of
this Agreement and to enforce  specifically  the terms and provisions  hereof or
thereof,  this being in addition to any other remedy to which any of them may be
entitled by law or equity.

            (b) Without  prejudice to the terms,  conditions  and  provisions of
Article XI, the Company and the Investor irrevocably submits to the jurisdiction
of the  United  States  District  Court and other  courts of the  United  States
sitting  in the  State of New York  for the  purposes  of any  suit,  action  or
proceeding  arising out of or relating to this Agreement and (ii) hereby waives,
and agrees not to assert in any such suit, action or proceeding,  any claim that
it is not personally  subject to the jurisdiction of such court,  that the suit,
action or  proceeding is brought in an  inconvenient  forum or that the venue of
the suit, action or proceeding is improper. Each of the Company and the Investor
consents  to process  being  served in any such suit,  action or  proceeding  by
mailing a copy  thereof to such party at the address in effect for notices to it
under this  Agreement  and agrees that such service  shall  constitute  good and
sufficient service of process and notice thereof.  Nothing in this Section shall
affect or limit any right to serve process in any other manner permitted by law.
The prevailing  party in any litigation in connection  with this Agreement shall
be entitled to recover from the other party all costs and  expenses,  including,
without  limitation,  reasonable  attorney's  fees,  incurred  by such  party in
connection with any such litigation.

      Section 12.14. Survival. The representations and warranties of the Company
and the Investor  contained in Articles IV and V and the covenants  contained in
Article V and Article VI shall survive the execution and delivery hereof and the
Closing  until  the  termination  of  this  Agreement,  and the  agreements  and
covenants set forth in Article IX and Article X of this Agreement  shall survive
the execution and delivery hereof and the Closing hereunder.

                                       51
<PAGE>

      Section 12.15. Publicity.  Promptly after the execution of this Agreement,
each party may issue a press  release or  otherwise  make a public  statement or
announcement,  including but not limited to, the (i) filing of a Current  Report
on Form 8-K with  respect to this  Agreement  or the  transactions  contemplated
hereby  or the  existence  of this  Agreement  and  (ii) and the  filing  of any
agreements or other documents as attached  exhibits to a form 8-K, 10-Q, 10-K or
any other Form filed by the Company  with the  Commission  with  respect to this
Agreement  or the  transactions  contemplated  hereby;  provided,  that prior to
issuing  any  such  press   release,   making  any  such  public   statement  or
announcement,  the party wishing to make such release, statement or announcement
consults and cooperates in good faith with the other party in order to formulate
such press  release,  public  statement or  announcement  in form and  substance
reasonably acceptable to both parties.

      Section  12.16.  Further  Assurances.  From  and  after  the  date of this
Agreement,  upon the request of the Investor or the Company, each of the Company
and the Investor shall execute and deliver such instruments, documents and other
writings as may be  reasonably  necessary  or desirable to confirm and carry out
and to effectuate fully the intent and purposes of this Agreement.

               [Remainder of this page intentionally left blank]

                                       52
<PAGE>

            IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly  executed by their  respective  authorized  officer as of the date first
written.


                              KINGSBRIDGE CAPITAL LIMITED



                              By: /s/ Valetine O'Donoghue
                                  ----------------------------------------------
                                   Name:  Valentine O'Donoghue
                                   Title: Director



                              DISCOVERY LABORATORIES, INC.


                              By: /s/ John G. Cooper
                                  ----------------------------------------------
                                    Name:  John G. Cooper
                                    Title: Executive Vice President and
                                           Chief Financial Officer

                                       53